Valuation update

Submitted by Rich Toscano on May 26, 2021 - 3:38pm

I'm still trying to put together a post with some big picture thoughts on the SD housing market. The market's confusing in several ways, and my thoughts are more jumbled than usual.

While I flail away at that, here are some updated valuation charts:







For the uninitiated, these measure the price of San Diego housing as compared to local incomes and rents. (We could separately chart prices vs. incomes and prices vs. rents, but tell a very similar story to each other so I've taken to collapsing them into a single measure).

The first graph shows that valuations -- prices compared to rents and local incomes -- are very high compared to their history, having only been higher during the bubble.

The second graph is one of the confounding factors I mentioned. Instead of measuring home prices, it measures monthly payments, thus incorporating mortgage rates into the picture. And this shows that even though (per the first graph) home prices are quite high, monthly payments are pretty reasonable compared to their history.

The interest rate situation renders the current situation very different from the mid-2000s bubble. If someone can lock in financing at these rates, the monthly nut is not actually that bad, and it may make sense to buy. As opposed to the prior bubble, when the only reason to buy was the belief that valuations would keep rising for the rest of time. This is one of the major reasons I don't consider this a bubble, despite the very lofty valuations.

However, to the extent that low rates are what's allowing prices to stay so high, that puts home prices at risk should rates increase significantly.

More to come at some point soon, I hope...

PS - Data note: up til now I've used the rent component of San Diego CPI to determine rents. However, they have been distorted by eviction moratoriums, resulting in a gap between how much landlords are actually getting (CPI) vs. what they are asking for from new renters. I believe the latter is the more appropriate comparison here. So, I've sub'd in rental stats from Zillow, which appear to more accurately reflect asking rents. For more on this disparity see this chart from this article by inflation analyst Mike Ashton.

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Submitted by sdrealtor on May 27, 2021 - 7:38am.

More great info Rich. The first thing that jumped out at me was when you put a line to market bottoms the valuation trend is clearly up over the last 50 years. Would it be reasonable to say the way we assign value to home ownership or the premium placed on home ownership has increased as a whole?

Submitted by Rich Toscano on May 27, 2021 - 10:44am.

I definitely agree that the trend has been upward. I don't know about the premium though because how much of it is just rates? The second graph shows that people are paying a lower monthly payment (vs. rents/incomes) than historical... so that would argue against the idea of people assigning a higher value to it. With that said - yes I definitely suspect it's a combination of increasing scarcity over time and demographic shift, in addition to lower rates.

FWIW I put that median line on there just for perspective, not to imply that the median is the equilibrium/sustainable/"correct" value. I thought about doing a trend line but that opens up some cans of worms. It's thrown off by the bubble, for one. For another, it implies that the trend will continue forever, which could lead to some dangerously off-base assumptions.

Submitted by sdrealtor on May 27, 2021 - 11:00am.

Understood. When I look at graphs like that I try not to over analyze and look for something that should be obvious and is staring me in the face. That slow gentle climb in the trend line was one of those things and made me wonder what it means.

Submitted by deadzone on May 27, 2021 - 11:00am.

Rich do you have individual charts for median rent and income? It would be interesting to see those plotted individually next to average mortgage payment.

Submitted by sdrealtor on May 27, 2021 - 11:33am.

So now we have new problem to deal with none of us have even considered. Stopped by a home for sale and spoke to agent. 30 year old has been living in nice family neighborhood tract home by himself the last 2 years. Gonna make 50% profit.

Asked him where he's going. He's staying in town and buying a new custom home down by the beach areas for almost $4M cash. When he saw the confusion on my face he simply smiled and said two words. Crypto Baby!

Submitted by gzz on May 27, 2021 - 11:36am.

Crypto is negative sum gambling because of "mining" costs, programming costs, security costs, and other transaction costs.

The winners are happy to announce they won, losers are much more shy.

It is especially negative to the USA because the winners are frequently scammers in China and the former USSR.

Submitted by gzz on May 27, 2021 - 11:42am.

Relative valuation is still low because very low market interest rates imply the value of safe assets with rising yields (even slowly rising) are very high.

I try to think of reasons why SD real estate won't keep rising quickly to match its true value, and it is pretty hard.

Over time wealthy societies spend large shares of income on health care first and luxury/positional goods second. And a nice home in San Diego is very positional!

Submitted by XBoxBoy on May 27, 2021 - 11:51am.

sdrealtor wrote:

Asked him where he's going. He's staying in town and buying a new custom home down by the beach areas for almost $4M cash. When he saw the confusion on my face he simply smiled and said two words. Crypto Baby!

So do you suppose he will report that income and pay the 1-2Mil in taxes due? Do Crypto wallet companies send their clients 1099s?

Submitted by sdrealtor on May 27, 2021 - 12:07pm.

I have no idea. I own none and never have. I dont understand it and the potential profits are not something I need to reach even my most aggressive goals.

Spoke to my son and he made a good point. Put a little money in each month I dont care about as a hedge. I may start just to learn something. I dont know? Really is outside my alivezone. Crazy though to see even one transaction from this. I really never even thought of it as a potential market force but clearly something that needs to be considered.

Submitted by deadzone on May 27, 2021 - 12:08pm.

The crypto currency gains are just another example of the obscene amount of wealth created by the Federal Reserve. And as I've mentioned before, following Sports Collectibles, every week I read about new record setting auctions. Gretzky rookie card just sold for 3.75 mil breaking all records for hockey cards. Asset prices are going nuts everywhere. Too much money in the system.

Submitted by sdrealtor on May 27, 2021 - 12:14pm.

So the crypto thing is kinda freaking me out. What I consider kids have been buying it all over the country and world for several years. I know a bunch I drink wine with around the US who do. Cash in a few million dollars and you can live anywhere? The beach communities in SD sure look like a pretty good spot to hang out for the next few decades. Hard to think of many better places for someone like that

Submitted by deadzone on May 27, 2021 - 12:14pm.

sdrealtor wrote:
I have no idea. I own none and never have. I dont understand it and the potential profits are not something I need to reach even my most aggressive goals.

Spoke to my son and he made a good point. Put a little money in each month I dont care about as a hedge. I may start just to learn something. I dont know? Really is outside my alivezone. Crazy though to see even one transaction from this. I really never even thought of it as a potential market force but clearly something that needs to be considered.

I created a coinbase account earlier this year but haven't had the balls to purchase any actual crypto outside of some shares of the bitcoin trust ETF. Clearly the rise of crypto makes sense as a response to the reckless gov spending and fed money printing. However, the extreme volatility shows every indication of a speculative bubble. I've been into precious metals for years and it is frustrating to see their mediocre performance even during this inflation environment where they should be going up big. But overall, this current speculative environment just reminds me so much of 1999.

Submitted by sdrealtor on May 27, 2021 - 12:28pm.

Just bought a little. What the heck crypto baby! To balance it out I bought more wine. I dont need either

Submitted by pinkflamingo on May 27, 2021 - 1:12pm.

Rich, out of curiosity, are property taxes factored into your monthly payment index? Mortgage + interest maybe low, but property taxes are based on the home price.

Going with sdr's example, 4M would be 42K in property taxes, almost 4k a month. With PMI@3% at 13,491/mo. Taxes would makes up a substantial part of the monthly.

Submitted by gzz on May 27, 2021 - 1:24pm.

DZ and SDR are finally in agreement, on crypto.

They are both wrong. Cyptocurrency is wealth destroying, not generating.

The intention of bitcoin's inventors was to be something useful for transactions. However, bitcoin is not actually used to buy and sell things.

It isn't "used" at all in any productive way, except for the limited purpose of buying drugs, cybercrime like ransomware, and evading government regulations on money transfers.

You're not investing, you are gambling in way that has a much larger rake than casinos. People think crypto is the way to wealth because the people who made money in it never shut up about it, but the larger group of people who lose money are embarrassed and don't go around telling you.

Submitted by sdrealtor on May 27, 2021 - 1:36pm.

He paid cash. Most high dollar sales are all or mostly cash. They are also a very small segment of the market and have little to no impact on the stats

Submitted by gzz on May 27, 2021 - 1:39pm.

I've been into precious metals for years and it is frustrating to see their mediocre performance even during this inflation environment where they should be going up big.

Long term charts of PM show long periods of stability punctuated by short periods of huge gains.

Silver's average yearly price was $15.71 in 2018, $16.21 in 2019, and $20.55 in 2020. Now it is about $28. That's not mediocre to me.

And if you happened to buy ASEs specifically, you saw an additional gain since before 2020 they sold at a spot premium of about $2, and now it is more like $10. In other words they went from about $18 in 2018 to about $38 now, more than doubling.

Submitted by sdrealtor on May 27, 2021 - 1:39pm.

gzz wrote:
DZ and SDR are finally in agreement, on crypto.

They are both wrong. Cyptocurrency is wealth destroying, not generating.

The intention of bitcoin's inventors was to be something useful for transactions. However, bitcoin is not actually used to buy and sell things.

It isn't "used" at all in any productive way, except for the limited purpose of buying drugs, cybercrime like ransomware, and evading government regulations on money transfers.

You're not investing, you are gambling in way that has a much larger rake than casinos. People think crypto is the way to wealth because the people who made money in it never shut up about it, but the larger group of people who lose money are embarrassed and don't go around telling you.

Well someone converted it into enough cash to buy a beautiful home so there’s that. I’ll never be a big investor in it but I can have some fun with my mad money and learn something along the way. Crypto Baby!

Submitted by sdrealtor on May 27, 2021 - 1:47pm.

gzz wrote:

I've been into precious metals for years and it is frustrating to see their mediocre performance even during this inflation environment where they should be going up big.

Long term charts of PM show long periods of stability punctuated by short periods of huge gains.

Silver's average yearly price was $15.71 in 2018, $16.21 in 2019, and $20.55 in 2020. Now it is about $28. That's not mediocre to me.

And if you happened to buy ASEs specifically, you saw an additional gain since before 2020 they sold at a spot premium of about $2, and now it is more like $10. In other words they went from about $18 in 2018 to about $38 now, more than doubling.

Assuming perfect timing is an awful big if. Assuming awful timing someone who bought prime RE at prior peak and held on still made out like a bandit. You can have your PM. If I'm gonna invest in a commodity it will be wine where I know how to produce significantly higher gains and can drink the profits

Submitted by Rich Toscano on May 27, 2021 - 1:56pm.

pinkflamingo wrote:
Rich, out of curiosity, are property taxes factored into your monthly payment index? Mortgage + interest maybe low, but property taxes are based on the home price.

Going with sdr's example, 4M would be 42K in property taxes, almost 4k a month. With PMI@3% at 13,491/mo. Taxes would makes up a substantial part of the monthly.

Yes, they are.

Submitted by gzz on May 27, 2021 - 2:10pm.

I'm skeptical of wine as a source of "significantly higher gains." It would seem to require a lot of time, as well as storage space, plus lots of transaction costs.

Now if you like the process of buying, storing, and selling wine, then those aren't costs and you can do well. But it's a hobby then, not an investment.

You can have your PM.

It is well under 1% of my portfolio. For me it is a hybrid hobby and investment. I have a few boring old bars I will dump when there's another speculative frenzy for silver, which happens every 10-15 years.

Then, probably like with you and wine, I enjoy the process of buying and selling European gold and silver coins, in particular Western Europe from the late 18th to early 20th century.

Submitted by sdrealtor on May 27, 2021 - 3:28pm.

Last week bought 3 bottles for $X each. Turned around and sold 2 for 1.5X each the next day. Buyer in NJ sent me pre paid FedEx label to overnight to him. That's about 50% profit in one day with zero transaction costs. Could have sold the third bottle and it will only increase in value but as of now it's basically free to me and I'd love to drink it someday. I know what to buy, where to buy it, how to sell it and what I'm doing. You can't do anything close to that with PM. You are right that it's a hobby but if I wanted to I could easily turn it into a very profitable business

Submitted by deadzone on May 27, 2021 - 2:31pm.

gzz wrote:
DZ and SDR are finally in agreement, on crypto.

They are both wrong. Cyptocurrency is wealth destroying, not generating.

The intention of bitcoin's inventors was to be something useful for transactions. However, bitcoin is not actually used to buy and sell things.

It isn't "used" at all in any productive way, except for the limited purpose of buying drugs, cybercrime like ransomware, and evading government regulations on money transfers.

You're not investing, you are gambling in way that has a much larger rake than casinos. People think crypto is the way to wealth because the people who made money in it never shut up about it, but the larger group of people who lose money are embarrassed and don't go around telling you.

I can't debate Bitcoin's realistic usability as a currency, but up until now it is definitely wealth producing, not destroying, for anyone who purchased it prior to 2021 they are up huge. But yes you are correct, it appears to be a speculative play (aka gambling) which is no different than buying .com stocks in the late 90s or Tesla and others today. So in the long run, these things usually run their course and many will lose their shirts.

But realistically, as long as the Fed keeps printing, I don't expect cryptos to crash. All of the Fed money needs to go somewhere, whether real estate, stocks or baseball cards. Crypto is trendy and easy to buy. No reason to think it will crash as long as the Fed spigot stays on full blast.

Submitted by gzz on May 27, 2021 - 2:39pm.

for anyone who purchased it prior to 2021 they are up huge

They think they are "up huge." If more than 1 in 1000 of them tried to sell their "up huge" beanie babies, they would find they are not "up huge" but a pyramid scheme.

I can't debate Bitcoin's realistic usability as a currency

Of course you can't. Nobody can. There is no justification for buying it other than thinking someone else will buy it later on for even more. The old justification turned out to fail. But now there is not even a pretense to being useful.

People know full well they are facilitating criminal activity and poisoning the air when they buy crypto, but they don't care because of speculative fever and greed. 99.99% of articles are either about its price going up and down or the crime and environmental destruction it causes.

Nothing at all is positive. It is gambling, but far worse.

Submitted by deadzone on May 27, 2021 - 2:41pm.

gzz wrote:

I've been into precious metals for years and it is frustrating to see their mediocre performance even during this inflation environment where they should be going up big.

Long term charts of PM show long periods of stability punctuated by short periods of huge gains.

Silver's average yearly price was $15.71 in 2018, $16.21 in 2019, and $20.55 in 2020. Now it is about $28. That's not mediocre to me.

And if you happened to buy ASEs specifically, you saw an additional gain since before 2020 they sold at a spot premium of about $2, and now it is more like $10. In other words they went from about $18 in 2018 to about $38 now, more than doubling.

If you look at Gold for instance, over the last 10 years or so, yes it has gone up. But it has seriously underperformed stocks, crypto, and RE over that period. And it doesn't provide any income (unless you own a jewelry store). So yeah it is nice to own but not exciting. I would have expected both Gold and Silver to be way higher today given the runaway inflation that is going on in all other asset classes.

Submitted by deadzone on May 27, 2021 - 2:49pm.

gzz wrote:

for anyone who purchased it prior to 2021 they are up huge

They think they are "up huge." If more than 1 in 1000 of them tried to sell their "up huge" beanie babies, they would find they are not "up huge" but a pyramid scheme.

I can't debate Bitcoin's realistic usability as a currency

Of course you can't. Nobody can. There is no justification for buying it other than thinking someone else will buy it later on for even more. The old justification turned out to fail. But now there is not even a pretense to being useful.

People know full well they are facilitating criminal activity and poisoning the air when they buy crypto, but they don't care because of speculative fever and greed. 99.99% of articles are either about its price going up and down or the crime and environmental destruction it causes.

Nothing at all is positive. It is gambling, but far worse.

No different than the "gambling" that goes on in the stock market.

Submitted by gzz on May 27, 2021 - 2:51pm.

DZ, there has not been any runaway inflation. Assets prices are high because that's what happens when interest rates fall. The present value of those future flows go up. Houses and stocks are just like bonds in this way.

The goldbugs have two unsupported conspiracy theories. First, there's inflation that the BLS and other government entities and economists are covering up.

Second, the banks and government are sinisterly holding down the price of gold and silver.

Both of these are implausible for a ton of reasons.

To start with, the US gov profits from inflation. It makes seigniorage on the new currency; it gets to tax large nominal capital gains; tax brackets go up; the real value of its trillions in fixed rate debt go down.

Second, the US gov is the largest owner of gold in the world, by far.

Third, the US gov actively promotes retail PM ownership by minting beautiful low-premium coins in all sorts of sizes and designs.

Submitted by deadzone on May 27, 2021 - 3:27pm.

gzz wrote:
DZ, there has not been any runaway inflation. Assets prices are high because that's what happens when interest rates fall. .

10y treasury rate has more than doubled in the last year. Meanwhile, asset prices continued to go up during that same period. You are clueless if you don't see inflation.

The reason is this: https://www.federalreserve.gov/monetaryp...

Submitted by Rich Toscano on May 27, 2021 - 8:55pm.

sdrealtor wrote:
So now we have new problem to deal with none of us have even considered. Stopped by a home for sale and spoke to agent. 30 year old has been living in nice family neighborhood tract home by himself the last 2 years. Gonna make 50% profit.

Asked him where he's going. He's staying in town and buying a new custom home down by the beach areas for almost $4M cash. When he saw the confusion on my face he simply smiled and said two words. Crypto Baby!

Back in the housing bubble, a hater emailed me to tell me what an idiot I was, and ended saying something like, "I've made more money on my house than I ever could at my job."

I thought that parting shot was pretty funny, because it seemed like a pretty good indicator of a housing bubble!

Anyway the Crypto Baby story brought that back to mind. 30 year olds buying beach houses with cash. Very late-stage-speculative-mania stuff.

I'm on team gzz here if that's not clear. Bubbles by (my) definition must involve 2 things: egregious overvaluation, and euphoric behavior.

- Valuation: crypto is impossible to value. It's not giving you a stream of cash flows like a stock or bond -- it's just worth whatever the next person is willing to pay. So who can say for sure on the value question. But stories like sdr's sure do suggest massive overvaluation. And that very inability to value it means that, if it is a bubble, the crash could be absolutely epic.

- Behavior: I've literally never seen more bubbly, euphoric, cult-like behavior than in crypto. The behavior category alone is enough for me to believe that this is likely a giant speculative mania.

I think there are major bubbles going on in crypto and in parts of the stock market. I don't think housing is a bubble, but I DO think a lot of bubble money is flowing into housing. If I am right, those inflows will go into reverse at some point.

Submitted by sdrealtor on May 27, 2021 - 9:41pm.

I don't get crypto. I don't have to. I don't need it or anything like the gains people are chasing to meet my goals. I don't think it's a major force in the housing market but truthfully don't know. However there is some of it going on and it's one more small log on a very big raging fire. What struck me most is there are always things going on we aren't aware of, don't anticipate or factor in. This is simply one more.

With that said, I always know I could be wrong. I constantly ask myself as part of my decision making , what if I'm dead wrong? For that reason alone I'll buy a little with money I can afford to never see again and if it goes up I'm pull out my original investment when it makes sense to me and let the rest ride. Many of the smartest business and wall street minds are doing the same

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